Business status

​There is a lot of confusion about what it means to be a sole trader, partnership or limited company. These terms are used to describe the status of a business. Before starting to deal with your debts, it is important that you understand which term describes your business and which budget you should use.

Which budget?

If you are a sole trader, a partner in a partnership or a director of a limited company, you can use Your budget to work out a budget. You can use this budget to help negotiate with your business and personal creditors and choose the right debt option for you and your business.

Sole trader

See our fact sheet:

Sole traders.

This is where you are an individual and work for yourself. You may also have people working for you. All bills, bank statements, invoices, letterheads and other business correspondence have just your name on them. Even if you trade using a business name, you cannot separate yourself from your business debts.

You are personally liable for all of your business debts. This means you have to pay these debts out of your own income, even if you have stopped trading. If you do not pay, the creditors you owe money to could take further action against you personally. If this happens, both your business and personal assets could be at risk.



income tax

Partners are taxed only on their share of the business profits. If one partner owes income tax, Her Majesty’s Revenue & Customs (HMRC) cannot claim it from the other partners.

A partnership is a separate legal entity. This means that it can have its own assets (for example, property) and creditors can take action against the partnership itself to recover the partnership’s debt.

In a partnership, all partners (separately and together) are also liable for all business debts. This is known as ‘joint and several liability’. This means that all partners can also be taken to court for the total debt, and it is not possible to divide up responsibility for the debts. If creditors cannot get the partnership to pay the debt, they can ask one, or all, of the partners to pay the full debt. However, for income tax, partners are taxed only on their share of the business profits, so if one partner owes income tax, Her Majesty’s Revenue & Customs can only get back the income tax from that partner.

By law, you do not have to have a written partnership agreement, though you may decide it is a good idea to have one. Otherwise, all you need to do to show you are a partner of the business is to put your name on the business notepaper as a partner. So, if you leave the partnership, make sure that all the existing creditors know that you will not be responsible for any new debts after the date you left. Also, make sure your name no longer appears on the business notepaper. Keep copies of the letters you send your creditors.

If you have given a personal guarantee or a legal charge to a bank as security for the business debts, make sure the bank accepts that you are only responsible for any debts that happened before you left the partnership.

See our fact sheet:


If one partner goes bankrupt, although the debt will be written off for that partner, creditors can still try to get the full debt back from the other partners. This means that partners with the most assets have the most to lose.

If you have to pay a partnership debt, you have the right to take the other partners to court for their share of the debts. If one of your partners has paid a partnership debt, they can take you (and any other partners) to court to get back your share of the debt.